Friends abroad tell me about the state of the rand

IKNOW my day will be a write-off when the first e-mail I see on my phone when I wake at 6.30am is not from Groupon or the Daily Maverick but from friends in the US saying: “Dude! What is happening with the rand!?” So began yesterday.

By about 9am, when a friend from the UK asked me whether or not he should continue betting against the rand in an online spread-betting game, I was primed and ready: “Go for it.”

As you know by now, the rand’s response to the publication of the minutes of the US Federal Reserve’s open market committee (FOMC) meeting was to slide to an unceremonious R10.44/$ — its lowest since March 2008.

It did recover later in the day to about R10.30/$ as traders came to their senses and good news came from China and the eurozone in the form of better than expected manufacturing figures.

What you might not know is that the minute you start writing about markets, the only thing people talk to you about at dinner parties is where the rand is and where it is likely to go. As a result of this forced “expertise” it didn’t come as much a surprise that the rand reacted as wildly as it did.

To be clear, I think the market response was an overreaction.

But under current conditions markets tend to be unreasonably flighty. News that Federal Reserve policy makers were “broadly comfortable” with plans to taper this year if the economy strengthens is hardly new.

It is understandable that markets are anticipating the decision and everyone hopes to jump the gun and get out before the other guy does, but for heaven’s sake they really should wait until it actually happens. If this was a game of Simon Says, they’d all have been out several FOMC meetings ago.

What did surprise me was that despite falling through the key R10.36/$ level overnight (albeit in thinner US markets) the rand didn’t slide all the way to R11/$ or worse as I had expected. For several weeks R10.36/$ has been the benchmark to be breached before a new era of currency weakness begins.

It is probably fair to say that the extent of the rand’s knee-jerk response is in large part driven by our persistently poor fundamentals. Speculation that what seems like most of the productive portion of the economy is planning on going on strike in the near future hasn’t helped. Of course there are still high returns to be made on the rand, but the potential for a sudden blowout is greater than for many of our peers, meaning the temptation to sell hard at the first sight of trouble is great.

Bloomberg reliably tells me that, having briefly lost the position to the Brazilian real, as of today the rand is once again the worst performing out of 24 emerging market currencies they monitor. We are of course not alone. The Indian rupee fell to a fresh record low yesterday in response to the FOMC minutes, and while the Turkish central bank has had some success in bolstering their currency by raising interest rates, most emerging markets are taking a beating as investor appetite for riskier equities wanes.

Since the first hints in May that the Fed was considering tapering its bond-buying programme, central banks in emerging economies have lost as much as $81bn through capital outflows and currency market interventions.

But as the Indians have learnt through bitter experience, this has done little to stem the flows.

Now while all this is interesting — and to those who are speculating potentially profitable — I can’t avoid dwelling on what the real-world repercussions of these movements are. If you are Rob Davies or one of the folk from the Manufacturing Circle, then a weak rand is allegedly a fabulous solution to the economy’s problems.

“It makes our exports more competitive!” they cheer.

And they are correct. If the rand stayed at about R11/$ for any length of time our exports would certainly gain some advantage.

Yes in the medium to long term the imported effects of the weaker rand would be passed on and some (or to be brutal — probably most) of the advantage would be eroded by inflation. But there would at least be an opportunity for manufacturers to respond to the environment, and plan ahead, and potentially grow the economy.

The trouble is that as long as we remain the most vulnerable emerging market currency, and hence remain volatile and susceptible to sudden flights of capital fancy, it doesn’t matter at what level we trade. We need stability at any level to stand a fighting chance.

Until then, prices remain sticky downwards and the imported effects of a weaker rand translate into more cents for every loaf of bread and another rand for each taxi commute.